BAR: FS Analysis: Financial Statement Fluctuations & Ratios Flashcards
Cash conversion cycle
Operating cycle minus days payables outstanding
Heterogeneity in operation
If company divisions operate in distinct industries, combining performance oversimplifies data and doesn’t provide insight into divisional performance
Inconsistent interpretation of results
Different ratios may provide conflicting interpretations of performance for the same company
Need for judgment
Companies must determine if ratios are reliable in the context of industry and company history
Different accounting standards
Differences in accounting methods or standards limit the comparability of ratios across companies
Numerator
The top part of a ratio that has a direct relationship with the ratio; increases to the numerator result in increased ratio
Denominator
The bottom part of a ratio that has an inverse relationship with the ratio; increases to the denominator result in a decreased ratio
Debt to equity
Total debt divided by stockholders’ equity
Asset turnover ratio
Net sales divided by average total assets
Earnings per share
Net income minus preferred dividends divided by weighted shares outstanding
Liquidity Ratios
Help assess an entity’s ability to pay short-term obligations
Working capital ratio
Current assets minus current liabilities
Current ratio
Current assets divided by current liabilities
Quick ratio
Cash plus marketable securities plus net receivables divided by current liabilities
Receivables turnover
Net credit sales divided by average net receivables
